The Crude Crash Has Created Oil’s Technological Superpowers

Falling oil prices which started in late 2014 have highlighted an increased emphasis on the cost of producing oil, particularly from shale oil formations in the U.S. With 50 percent of U.S. oil production coming from U.S. shale, analysts initially estimated breakeven prices for shale oil operations to be at $75 per barrel, then lowering those estimates to $50 per barrel, and now, in some core regions, breakeven prices are as low as $30-$35 per barrel.

The reason U.S. shale continues to see lower breakeven prices is because companies in the U.S. continue to innovate shale drilling techniques and technology. Similarly, Canadian shale drilling continues to improve alongside that of the U.S., and Canada has implemented similar technological progress towards the extraction and refining of oil from its oil sands. This continued U.S. improvement in oil and gas drilling, extraction, and refining technology provides for the hypothesis that such cutting-edge and unrivaled capability has the effect of anointing a qualification to those within the industry as “the technological superpowers of oil.”

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Declining Production, Desperation, and Technological Adoption

For some time, oil & gas producing countries as well as those countries that depend on energy imports have been experiencing a decline in domestic production, forcing these countries to increasingly turn to technology for oil & gas drilling, extraction, and production. The technology they turn to has principally been developed by experts in the U.S. and Canadian oil & gas markets, and is now being earnestly adopted by countries around the world.

1. Oman & Occidental: Enhanced Oil

One of the first examples of the adoption of such technological innovation was during the declining oil production period in Oman from 2000-2005. Oman’s economy is heavily dependent on oil exports and, thus, declining oil production was problematic. That problem was solved by enhanced oil recovery innovations first developed and used on mature oil fields in the U.S. and Canada.

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As Oman realized that extraction and oil production from mature fields like the south-central Mukhaizna field, needed to improve recovery and operations, the Sultanate of Oman turned to companies like Occidental Petroleum (OXY) to take over operations. Occidental’s 30 years of experience in Oman and its enhanced oil recovery techniques used in its operations in the U.S. Permian Basin Central platform allowed the company to help boost Oman oil production from the Mukhaizna field by 15 times 2005 levels. Occidental would use flooding technology and techniques improved upon in the Permian Basin Central platform to begin a steam flooding operations in Oman. Steam flooding technology is used in Canada’s oil sands since the 1980s and is referred to as steam assisted gravity drainage (SAGD).

Since oil production collapsed in Oman from 2000-2005, companies like Occidental have leveraged technology and helped the country set all-time record oil production of 1 million barrels per day in 2015.

2. Egypt and Apache: Horizontal Drilling

Egypt is another example of a country that needed to adopt technology and innovation. As a major exporter of natural gas, Egyptian gas production fell from 2009 highs and by 2013, while natural gas production met domestic consumption, Egypt was no longer an exporter of gas. Currently, Egypt is in need of natural gas to meet domestic demand and export obligations to certain countries, LNG terminals, and pipeline facilities. Related: U.S. Oil Rig Count Declining Again After Single-Week Reprieve

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Fortunately, in 2015, Eni Spa (E) discovered one of the largest gas finds off the Egyptian coast in the Mediterranean: the Zohr field. While Eni’s discovery will likely increase Egypt’s gas production by 33 percent into 2019, Egypt had encouraged the use of new technologies to discover gas onshore before the Zohr discovery.

One of Egypt’s largest onshore oil & gas producers, Apache Corp. (APA), had begun using U.S. technologies to increase the production of oil & gas from 2013/2014. Apache discovered the usefulness of horizontal drilling and fracturing as it noted the layered formation in Egypt’s Western Desert is similar to the layered formations in its operating acreage of the Permian Basin.

In January 2014 Apache released results of a horizontal well drilled in Egypt’s Western Desert. The horizontal well, which was drilled at a cost of $6.5 million and to a lateral length of 1,970 feet, produced 2,181 barrels of oil equivalent per day (77 percent oil). To put that into perspective, Apache drilled a horizontal well in the Midland Basin of the Permian Basin for $4.5 million with a lateral of 5,054 feet which produced 1,372 barrels of oil equivalent per day (69 percent oil). With the success of Apache, Royal Dutch Shell (RDS-A) has partnered with Apache to drill for unconventional gas in Egypt and Dana Gas will test horizontal wells in the Nile Delta.

The green circles outline where horizontal drilling for unconventional reserves are taking place:

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3. Turkey: Tight Gas

Finally, Turkey is completely dependent on oil & gas imports with 98 percent of gas imported from other countries. The Turkish natural gas market trades at a premium to its U.S. and European counterparts and has been a coveted market for Russia, Iran, and Azerbaijan, who supplies Turkey with 87 percent of its total natural gas imports.

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Turkey has one other main domestic gas producer aside from Turkey’s state-owned Turkish Petroleum. A small Canadian gas producer, Valeura Energy (VLE.TO), has begun testing and producing from horizontal wells that have been fractured to access tight gas deposits in Northwest Turkey’s Thrace Basin.

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With royalty rates of 12.5 percent, a low tax rate of 20 percent, and a premium gas market, investment in Turkey’s domestic natural gas industry has become very attractive. In May 2015, Statoil (STO) had taken notice of Valeura Energy and the company bought a stake in Valeura’s Thrace Basin operations for a total value of $36 million. As Valeura tests horizontal drilling and fracturing in the Thrace Basin, its well economics show per well payouts of less than one year at current gas prices. Related: Why Chevron Is Investing $37B In The World’s ‘’Most Difficult Oil’’

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Technology’s Role in Oil & Gas Going Forward

By no means has U.S. and Canadian technology in shale and heavy oil been wholly adopted around the world as the de facto standard. This may, in fact, be a good thing because the technologies used by U.S. and Canadian companies give them a distinct competitive advantage that has helped shift the dynamics of the global oil industry. The implementation, development, and innovation of U.S. shale drilling, enhanced oil recovery, and Canadian heavy oil extraction has been proven over decades and it gives the world an insight into how new technologies can re-invigorate oil & gas production.

Recently, Mexico opened several bidding rounds on oil & gas exploration and production blocks to foreign companies and it plans to develop its oil & gas deposits with technologies from the U.S. and Canada. Mexico has noted the prolific Eagle Ford shale formation in the U.S. extends southward and Mexico hopes to tap into the extended unconventional resource with the help of U.S. shale technology and investment in energy infrastructure.

Additionally, Latin American heavy oil producers, Mexico and Venezuela, are facing technological issues in the blending and refining of its extra heavy oil. Similar to Canada, Mexico and Venezuela must import ultra-light oil from the U.S., referred to as condensates, in order to blend with its heavy oil. The blending allows heavy oil producing Mexico and Venezuela to flow its oil through export facilities and domestically refine its oil production with dated refining technology. The importing of condensates from the U.S. is costly and takes away from a country’s oil producing independence. Canada has countered some of its reliance on importing U.S. condensates by both producing its own condensate and building complex refining infrastructure. Currently 42 percent of condensates used to blend into Canada’s oil sands production are produced domestically and 37 percent of Canada’s oil sands production is upgraded into lighter oil by projects like Canada’s Syncrude partnership. All this lessens Canada’s dependence on U.S. condensates and makes Canada’s heavy oil cheaper and more competitive in the U.S.’ largest heavy oil refining market: the U.S. Gulf Coast.

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While the Canadian model for heavy oil is something Mexico and Venezuela are both looking to replicate in the future, both countries are going to need to attract stable investment and technology. Mexico has begun capitalizing on foreign investment, but Venezuela may need to push for further capital reform and solve deeply entrenched political issues in order to attract large investments.

Technology’s Role in Oil & Gas

The world no longer operates under the “he who has all the gold makes all the rules” paradigm. In fact, that paradigm has shifted. In the new age of technology, those who can innovate and adapt are able to control and influence part of the market. While the most efficient and largest oil markets in the world: the U.S., Saudi Arabia, and Russia are all testing and using horizontal drilling and fracturing as the technology of the future – it’s the U.S. that is the most advanced of the three regions.

Saudi Aramco, the state-owned oil producer of Saudi Arabia, has established the Aramco Research Center in Houston to research and explore the usage of unconventional oil & gas production. Additionally Saudi Aramco has been attempting to acquire U.S. drilling technology through recruitment targeting shale workers. Russia’s Lukoil is also using horizontal drilling and fracturing to increase production in some of its Siberian oil fields, but it has yet to reach anywhere close to the size and scale of U.S. shale oil & gas production.

As technology plays a larger role in the next phase of growth in the world economy we are seeing traditional markets being altered by this “third industrial revolution.” In the US, Amazon dominates the retail industry, Facebook dominates the way we communicate, and YouTube has changed the landscape of entertainment. The new technology and innovations developed and improved by the U.S. and Canada’s oil & gas industry may soon dominate the global oil & gas industry as these technologies and techniques further make their way into global markets. The next major oil superpower may not necessarily be a country with vast resources but rather the technology and innovation created by countries and companies that adapt to the changing dynamic of the new oil & gas order and that foster investment and competition within the industry.

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Yeah, drilling technology has definitely kept us from $200/bbl oil but it seems pretty clear that 1. It is not very profitable for US shale production at less than around $60 likely at a minimum. 2. Finding new shale reserves with decent quality and relatively easy production is getting a lot tougher.

So I find the continuation of this "new drilling technology miracle" type of story, while scores of producers who have used this technology go bankrupt, very puzzling.

Keith Martin on May 30 2016 said:

If breakeven prices for tight oil are really $30 - 35 as claimed here, why is the rig count still declining as oil hits $50? Why is the backlog of uncompleted wells (DUC's) not reducing at a faster pace? And why are US and Canadian E&P's still going bankrupt with unsustainable debts? I am not denying that technological advances are being made, but this breakeven price is pure propaganda.

doug on May 30 2016 said:

the production figures for US in that graph seem high. Where did you get the 14 mbpd from? US EIA has it at only a little over 9 mbpd:

Bob: This was written in 2016. The $30-$35 breakeven is in some core regions, not across all shale. Shale formations differ and require technology and techniques that fit their depth, pressure, layered properties. Companies are still improving shale drilling technology and techniques in their respective basins. Companies are using down spacing, new fracturing methods with sand and water, more fractures per lateral to extract more oil from their proven reserve base. It would take a whole other article to explain these new technologies in shale drilling alone.

Dave: Some new rigs are much more efficient than older rigs and, thus, they are no longer used at these prices. As it relates to bankruptcies, it is company dependent. Some companies used debt to grow and pay an unsustainable dividend as investors searched for yield, some companies bought expensive peripheral shale acreage or companies that cost more to produce depending on depth, layers, pressure, and access to infrastructure, and finally, some players were more natural gas and NGL weighted which fetched a much lower price than oil in barrels of oil equivalent.

Doug: The numbers I got were from the EIA and they include oil & liquids, not just oil production.